Well, I like this idea in Barron's. Instead of having a writer quote and (possibly mis)interpret some option analysts, how about having the analysts themselves write their piece?
So with that, Striking Price brings us John Marshall and Mary Grant from Goldman.
THE LATEST EARNINGS SEASON was one of the most volatile in the past 10 years for many stocks. The increase in earnings-day volatility was especially jolting for investors after the unusually low-volatility environment of early 2007. This may be just a preview of coming attractions; we expect buying strategies related to short-term, single-stock volatility to gain in popularity ahead of earnings events in the first half of 2008.
Earnings-day moves in the third-quarter reporting season were high, not only relative to those in recent quarters but also to those in the past decade. We analyzed one-day moves following earnings in the past 40 quarters for our universe of 300-plus stocks. One-day moves on days when earnings were reported were larger, on average, in the latest earnings season than in any quarter in the past five years. In our 10-year study, earnings-day stock volatility was only slightly greater in two quarters out of 40 (both in 2002).
The pickup in volatility on days when earnings were announced was driven by exceptionally large moves in financials and consumer-discretionary stocks. The average stock moved up or down 4.9% on its earnings day in the most recent quarter. This was 45% greater than moves in the April 2007 quarter and 20% above-average, relative to the past five years.
As fourth-quarter earnings season kicks off next week, we focus on financial stocks. Among those reporting before the January expiration, options already imply unusually large moves for many financials, including Merrill Lynch (ticker: MER), Washington Mutual (WM) and Citigroup (C).
I gotta be honest here, I just don't see it.
The chart above is the vol. chart on Merrill, normalized 30 day vol. Do options look especially pumped? REALLY hard to make that case. I mean yes, they're high relative to most of the trading in the last 52 weeks. But not at all high vs. the last few month's, or the volatility of the stock itself. No way in the world would I look at this chart and even know there is news coming up soon, much less call it bid up.
Is this some sort of quirk though? I mean volatility hear is *normalized*. What if you isolate Jans?
Same story. They are at a mid 50's volatility, VERY far from exceptional.
And Citi's chart looks exactly the same.
WM is a little pumped. But let's be realistic, it's a $13 stock, down like 70%, and there's real fear that stock is going to 0. I would call that more of a special situation than an example of option over-bidding.
4 comments:
Hello Adam, What is the best way to estimate how much vols will implode by following an earnings announcement ? Would you say taking the IV diff of the two contracts straddling the announcement is better than estimating it from a normalized chart like those at iVolatility ?
there's no single correct way imho. What I do is look at the HV and look at the *typical* IV and guestimate. It's more art than science. Say a company is set to report this week. It might very well be that even after the news, it will settle at a relatively high volatility. That seems to be the trend lately.
Another *tell* may be outer month options. They have very little earnings bid up, the volatility there is more *real*
Thanks, looking to refine my approach before the season really kicks off.
np, good luck.
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